6.2.1.2 Price and Subsidy Policies

Price signals can only influence demand and supply if they actually reach economic
agents and if those economic agents have the opportunity to respond to them.
In Russia, energy intensity increased by 30% between 1990 and 1998, while energy
prices also increased tremendously (IEA, 1997b, p. 50)14.
Experience shows that it takes time for economic agents to adjust their behaviour
to new price signals, not only because of capital stock turnover, but also because
consumers often do not have an accurate knowledge of their energy consumption,
or the technical capacity to reduce it. Various types of energy market reforms
and the pace of energy price reforms are designed to create and clear channels
for market signals to work.

It is a difficult policy challenge, and therefore a time-consuming process,
to bring prices into line with real costs. This is true both in developing countries,
where the poor pay a high cost for low-quality energy services (or a low cost
that is heavily subsidized) and in developed countries. Although data on energy
subsidies are incomplete, partly because such support is difficult to identify
and measure, some evidence indicates that subsidies on coal production, including
transfers from both consumers and taxpayers, are declining in a number of OECD
and developing countries. Recent data suggest that the total producer subsidy
estimates for the coal production of Germany, UK, Spain, Belgium, and Japan,
which amounted to over US$13 billion at the beginning of the 1990s, had declined
to less than US$7 billion by 1996 (OECD, 1998a, 1998b). In addition, case studies
in the energy supply sector identified the following areas for potential subsidy
reforms: removal of coal-producer grants and price supports; reforming subsidies
to investment in the energy supply industry; and regulatory reform to eliminate
non-tariff barriers to the energy trade (OECD, 1997a, 1997b).

An IEA (1999b) analysis of fossil energy subsidies in China, Russia, India,
Indonesia, Iran, South Africa, Venezuela, and Kazakhstanwhich accounted
for 27.5% of the worlds total energy demand in 1997claimed that
removing such subsidies would lower CO2 emissions by 16% in these countries,
amounting to a 4.6% reduction in global emissions15.

The transport sectorto give an important exampleis another sector
that receives subsidies detrimental to the environment. Transport is indirectly
subsidized through infrastructure financing and through tax benefits, which
enhance the transport volume. According to Shelby et al. (1997), energy
subsidies were higher than those to transportation for the OECD area. They also
found for the USA that larger CO2 savings could be achieved through
reform of indirect rather than direct transport subsidies, such as free parking
and supporting the highway infrastructure. Reform policies to internalize external
the effects will, according to one study, probably lower sector-wide emissions
by 1015% (OECD, 1997c)16.
These findings are in line with the results from other work on internalizing
the external cost of transportation (ECMT, 1998). The same studies also indicate
that local communities can better carry out policy reform in the transport sector,
because transport subsidies may originate at the local level and local communities
are more likely to value other ancillary benefits through policy reform (OECD,
1997c; ECMT, 1998). The transport sector is only mentioned as an example, because
it is responsible for a large share of the national emissions in many countries17.